By Jasmin Leitner, Head of Content at HFM InvestHedge
According to research conducted by HFM InvestHedge, some 63% of managers in the Billion Dollar Club (BDC) do not use a third-party marketer (TPM), compared to 25% that do.
Some 13 firms providing TPM services to Billion Dollar Club clients had between three and 12 of those clients as of 31 March 2017, 28 firms each had two BDC managers in their client roster while 153 TPMs each represented one BDC manager, our analysis of the most recently available SEC files indicates.
Digging deeper, 13% of BDC managers use a combination of independent TPMs and bank affiliated entities, another 13% only list an independent TPM while 8% only list bank-affiliated entities as marketing their funds.
Similarly, in the FoHF Billion Dollar Club, firms that do not use a TPM (54%) outweigh those that do (32%).
Reasons for not using a TPM vary. Managers that are close to, or have reached, capacity won’t need external asset-raising services, while others may have sufficient internal resources to meet their capital-raising needs.
Traditional cap intro services also remain a preferred source for winning new business, with nearly 80% of managers surveyed by the HFM Insights team indicating that they availed of the prime broker service in 2017, coming second only to managers using their own personal networks.
Nonetheless, for hedge fund managers wanting to diversify their investor bases and improve their geographic coverage, using a TPM or placement agent can be an attractive option.
The landscape of firms offering TPM services is vast, and managers need to weigh up carefully who they want to partner with, depending on their goals and resources.
In the following pages we set out points that managers need to consider and how TPMs aim to operate.
TPMs and placement agents vary significantly in how they work with managers and the type of investor coverage, and other services, they offer.
The head of distribution at one London-based manager with assets over $5bn stresses that a key consideration is defining the type of relationship you want to have with a third-party marketing firm and ensuring the legal terms are “abundantly clear” for both parties.
A few large firms operate on a global basis and expect managers to agree to terms reflective of that coverage.
“We really need global mandates. It’s a function of us taking on a limited number of mandates each year – if you take on a narrowly focused mandate, it’s still a lot of work – you have to do a lot of work whether it’s a small mandate or a big mandate so you might as well take on a big mandate,” explains Alex Moomjy, partner and head of hedge fund origination and project management at Park Hill Capital, a firm which has 125 staff working across six offices globally, including London, New York and Hong Kong.
Tom Kreitler, a partner and leader of the hedge fund group at Eaton Partners, agrees. He explains that while they typically agree to a manager presenting them with a shortlist of exclusions where relationships are already established, they want a broad scope, particularly if their services include redesigning presentations and “messaging”.
“We provide a robust advisory service and we don’t want to do that and work only with a short list of investors, because we think we’ve added value to their whole marketing capability.”
However, there are third-party marketing firms that only operate in certain jurisdictions, such as the Nordics or in parts of Asia, or that focus on particular client segments.
“Very few firms can merit that ‘we-want-exclusivity-and-we’re-going-to- cover-the-world-for-you’ type of relationship,” argues Andrew Saunders, co-founder of Castle Hill Partners.
“The business has evolved tremendously from the people who had their own private networks and would make a few introductions – there’s a lot more technology, more granular understanding of investor behaviour and more specialisation on investor demographics.”
He adds that Castle Hill, which offers a range of advisory services as well as working with some managers on capital-raising, has partners that focus on specific investor channels and regions, such as insurance companies or family offices on the West Coast, allowing them to offer deeper coverage of those segments.
Business development teams also need to consider whether they want to engage a TPM for a specific, existing product, a new product or a firm’s entire product suite, if applicable.
“Investors don’t just pick one fund – they start their work and due diligence at the management company level, they pick a team and a group’s ability to execute in the marketplace and secondarily pick the vehicle,” explains David Frank, founder of Stonehaven, which works with managers on a firm-wide level.
“We’ll usually zero in on a particular product, as it makes it easier to educate the investor – we’re unlikely not going to market a $22bn firm and all of their strategies,” says George Lucaci, partner at Mercury Capital Advisors, a global placement agent.
The distribution head at the London firm highlights product focus as a challenge facing TPMs.
“There’s no better person to convey the essence of your business than your own sales team who live, eat, sleep and breathe that every day,” she says.
“If you have multiple products, that’s even more challenging for a TPM to do. It can be hard for a manager to get that across and to have that filter, to know what you should be talking about and when.”
But one client solutions head at a sub-$5bn US hedge fund counters that by giving a TPM the freedom to discuss multiple products, a firm is likely to develop better client relationships.
“Not everything is always going to perform. If your TPM has the ability to go in and tailor something that we’re doing more closely to what the client actually needs it creates better alignment for everyone,” he says.
Fees and terms
Besides agreeing the scope of a TPM relationship, the fees and terms must also be considered.
Some marketers indicate that fees and terms can be customised to the client, while others have a set model.
“Obviously the fees are not paid by investors,” Don Steinbrugge of Agecroft Partners says. “We typically use one of two fee models. One is receiving 20% of management and performance fees that a hedge fund gets from accounts that come in through our efforts, or we also give them the option of paying us a 2% of asset placement fee.”
Taking a commission on fees earned by the manager has been more common in the hedge fund space, while paying an asset placement fee was previously a feature of private equity marketing agents, he adds.
Average hedge fund manager returns have struggled to hit double-digits since 2009, according to the HFM Global Index, and fees have decreased year-on-year, making a business model that is solely reliant on manager revenue commission an increasingly challenging proposition, and one which some firms have moved away from.
“That model was interesting when hedge funds were doing 25% to 30%, but we realised we also inherited a lot of risk with regards to the manager’s ability to perform,” the founder of one TPM which has moved away from that model explains.
“At the end of the day our role and costs don’t change based on whether someone returns 10% or 50% so we thought it wasn’t a great model.” The firm now charges a fee of between 2% and 4% on capital raised over a fixed time period.
The US-based client services head adds that if third-party marketers are only paid on fees generated by their clients, they may be more likely to chase performance, while those working on an annual or monthly retainer may be more incentivised to “stick around for the long haul”.
Agreeing on the length of an agreement and whether the third-party marketing firm receives any trailing fees on assets invested from an investor after a relationship has been terminated are also key negotiating points.
Making the relationship work
Numerous factors can impact the success of a relationship, including the appetite of investors for a particular strategy and manager at any given time, but the interaction with internal hedge fund staff is especially crucial.
“We need to work with internal [HF] people who don’t feel insecure about who we are and what we do,” one placement agent says.
The managing partners of Zurich-based marketer Polaris Investment Advisory make a similar point.
“It’s important for us that we really team up with the GP and their IR: when communicating with a prospect, we always make sure the manager’s IR is informed and if the client reaches out to the GP directly the IR proactively keeps us updated,” says Claus Hilpold, founder of the firms whose core markets are Germany and Switzerland.
Polaris makes ongoing communication with its managers a feature of its agreement, says Hilpold, adding that every call, email or meeting they have with a prospect on behalf of a manager is recorded in their CRM system and that managers receive a monthly report detailing any interactions that have occurred.
“If a US manager wants to diversify its investor base with European clients that means they will need to commit time to travel with us in Europe” Hilpold says.
One head of sales at a mid-size systematic macro firm tells HFM InvestHedge that time is as much of a cost and consideration as a hard dollar fee. The London-based firm reviewed several third-party marketers in 2016, including firms active in Europe and North America, with the travel required of investment and IR staff among the factors considered.
He says that each TPM relation- ship required management’s time in terms of supporting their initial efforts as well as monitoring the results. “There’s no free lunch,” he says.
Managers considering working with an external capital-raising firm need to consider carefully how much effort they are willing to put into that engagement.
One IR chief tells HFM InvestHedge they are in the process of onboarding a new TPM relationship and that the main representative has spent the last month shadowing the main teams within their firm.
“The individual is getting to know us and feels extremely excited. A lot of firms say, here’s a pitch book, get out there and raise us some money but we’ve tried that before and it doesn’t work.”
Asked where third-party marketers see the biggest competition, many of the firms approached by HFM InvestHedge indicated it was not a peer, but more likely to be internal, in that some managers will weigh up the cost of hiring internal sales staff versus employing a third-party marketer.
One IR points out that TPMs are most useful where a hedge fund doesn’t want to hire a dedicated sales force. “If you’re smaller and just starting to gain traction, you don’t want to employ people in all these different regions – you can accelerate your marketing efforts by using these guys who have already got an existing suite of contacts and can really map out the investor landscape.”
Park Hill’s Moomjy adds that when a fund reaches capacity, managers using a TPM are not burdened with an inflated staff roster. “We can expedite a capital-raise very efficiently and at the end of that they can turn us off.”
Timing is everything
Many third-party marketers argue that although they are open to a broad set of strategies, their decision to work with a firm will very much depend on whether they think their investor client base is, or would be, interested in a particular offering.
And even if there is signifiant demand for a particular strategy, it will also depend on who else a marketing agent currently represents. The majority of TPMs canvassed by HFM InvestHedge indicated that they would be unlikely to represent two firms running broadly the same strategy at the same time.
“You can’t simply decide to hire a third-party marketer and bring them on board in the next month. It’s a very long process and the placement agent might have other funds they’re focused on because of market demand or performance – such factors will also impact how soon they can work with you,” Johannes Asp, head of investor relations at Madrague Capital Partners, has previously told HFM InvestHedge.
“Raising capital is very much about the strategy that you represent and they’re deciding if they want to put capital to work or they’re very curious about a strategy and they’re likely to have capital for it in the future,” Eaton Partners’ Kreitler says.
He stresses that they’re always cautious about managing a fund manager’s expectations, adding that raising institutional capital can be a long process as sophisticated investors take their time completing extensive due diligence on prospective funds.
The capacity of a particular strategy or fund also comes into play, with capacity expectations of TPMs quoted to HFM InvestHedge ranging from $200m to $500m.
Several marketing agents highlight wanting to work with managers who are “best-in-class” and “differentiated” but beyond that, they have shift from what they consider to be main-stream hedge fund strategies to things that are considered more niche.
Park Hill has evolved its playbook as investors’ appetites have changed, explains Moomjy. “A few years ago we were, like everybody else, focused on the traditional hedge fund strategies: long/short equity, long/short actively traded credit, global macro and multi-strategy but about four years ago we started migrating to include more narrowly focused strategies, longer duration and less liquid in nature,” he says.
He estimates that around 60% of the mandates his team work on fall into that latter category.
The third-party marketer listings have been compiled using SEC Form ADV filings through 31 March 2017 of Absolute Return Billion Dollar Club managers – firms with total AuM of $1bn or more. The listings do not purport to cover the entire TPM universe, nor do they account for the entire client roster of each TPM.